September 28, 2021

Business Loan Borrowing Base: What It Is and Why It Matters

If you go this route, it’s important to familiarize yourself with a borrowing base. Put simply, a borrowing base is the amount of money your business can borrow. Let’s take a closer look at what a borrowing base is and how it may affect your small business.

Borrowing Base Definition

A borrowing base is the amount of money a lender will loan to your business based on the value of your collateral. Lines of credit often rely on a borrowing base and are made on a percentage of accounts receivable and finished goods inventory. If you opt for a line of credit for your business, you may repay it with customer collections and new advances made against the receivables and inventory. Since loans are associated with collateral, which fluctuates, the amount available to you will increase as your sales increase. On the contrary, your borrowing amount will decrease if your sales go down. Lenders prefer to use a business loan borrowing base because it provides them with a sense of security. A borrowing base serves as a benchmark and protects them with your assets. If you default on your payments, they’ll be able to take your inventory, receivable, and other collateral to recoup their losses. However, they can't seize your assets if you received an unsecured loan without collateral backing.

What Is Borrowing Base Advance Rate?

Most borrowing base lenders calculate what’s known as an advance rate. Also referred to as a discount rate, an advance rate is the value of your collateral based on a percentage rate, instead of the entire value of your assets. Advance rates typically vary by lender and the type of collateral pledged. To calculate your borrowing base, you’ll need to be aware of your lender’s advance rates.

Borrowing Base Example

Let’s say you apply for a business line of credit; you have $150,000 of accounts receivable and $50,000 of finished goods inventory. The lender you choose allows a 50% advance rate for the inventory and 70% advance rate for the accounts receivable as the borrowing base. In this scenario, your business can borrow a maximum of ($105,000 of accounts receivable plus $25,000 of inventory) against your collateral.

How Borrowing Base Monitoring Works

A lender will ask you to provide a borrowing base certificate (BBC), which is essentially a short form with financial information related to your business. While every lender has its own BBC requirements, most will request assets for collateral use, sales data, accounts receivable, and inventory assessments. Some lenders may ask a third-party company or professional to confirm the accuracy of what you provide in the BBC. Also, it’s important to note that you’ll need to complete a BBC on a regular basis, every month, quarter, or on a biannual basis. This is because the value of your assets can and will likely change over time.

The Pros and Cons of Borrowing Base for Small Business Owners

You may wonder whether a borrowing base is a positive or negative for your small business. Just like all financial products, it comes with notable pros and cons. A borrowing base can make it easier for you to secure a loan, especially if you’re a startup, newer business, or don’t have the best credit. If you’ve struggled with traditional business financing, it may be the ideal solution. On the flipside, a borrowing base requires you to put your assets on the line. If you fail to make your loan payments, the lender may repossess them and put you in a difficult situation.

What to Expect From a Business Lender

When it comes to borrowing bases, every financial institution has unique collateral and BBC requirements. Therefore, it’s important to meet with or contact a lender to learn more about what they expect from you. Be sure to ask them the following questions:
  • What type of information would you like me to share in the BBC?
  • How often do I need to provide the BBC (Monthly, Quarterly, or Bi-Annually)?
  • What are your advance rates?
It may also make sense to perform a few calculations on your own beforehand. Figure out your accounts receivable or how much money you’re owed on sales that you’ve invoiced.  Also, determine the value of your inventory or the current value of your products rather than what it cost you to manufacture them.

Conclusion: A Borrowing Base Can Help You Obtain a Small Business Loan

If you haven’t had much luck with traditional business financing and unsecured loans, a borrowing base should be on your radar. Once you know your accounts receivables and inventory, you may want to do some research to find lenders who offer lines of credit and consider your borrowing base. New call-to-action